Weak growth, resistance to reform and scepticism about trade threaten India’s Covid-19 economic recovery
Covid-19 has severely damaged the Indian economy. The nation is in recession after two successive quarterly GDP contractions, of minus 23.9 per cent and minus 7.5 per cent. The prospects of a robust revival in growth appear uncertain, given structural problems with the economy.
The Reserve Bank of India feels that “the economy is recuperating faster than anticipated” and expects GDP growth to turn positive in the coming quarters. Overall, though, it still expects the gross domestic product for this financial year to contract by minus 7.5 per cent.
Covid-19 hit India when it was already in an economic slowdown, following a deceleration in GDP growth in seven of the eight successive quarters since March 2018. The slowdown was a result of disruptive economic policies like the demonetisation of the Indian currency and a patchy roll-out of the goods and services tax (GST). The poor health of Indian banks perpetuated the economy’s sluggishness.
Today, Indian banks continue to bleed, with bad loans affecting their ability to lend. The decision to defer outstanding loan payments following the cash crunch inflicted by the Covid-19 lockdown has only made the situation worse. This can restrict the kind of investments required to kick-start an economic revival.
Reviving investment and consumption demand, and accelerating output growth, require enabling policies. Major reforms in product and factor markets are essential in this respect.
The Covid-19 crisis provided the government with an opportunity to usher in reforms. It has done so by bringing in new agricultural marketing and labour laws. But the new farm laws have generated a political backlash. Protests, led by wheat and rice farmers from Punjab and Haryana, have grown and attracted sympathy, becoming a headache for the government.
The new farm laws dismantle established structures and entrenched interests by giving farmers the choice to sell outside government-regulated markets, marking a new activism in the government’s pursuit of economic reforms.
Along with the labour laws, these reflect a pro-market shift in the government’s outlook on economic management, which has until now focused mostly on expanding income support for various sections of the population through welfare schemes.
The protests are testing the government’s resilience. If it capitulates to political pressure and agrees to repeal or significantly amend the new laws, it would be a further setback for reforms in India.
The government needs to look at why the labour laws, passed alongside the farm laws, haven’t generated as much protest; the former are a result of extensive consultations with various stakeholders over years.
The farm laws, in contrast, were barely debated and discussed, and were hurriedly pushed through both houses of Parliament in an abridged session. The hasty and non-consultative approach to passing these laws, notwithstanding their clear economic rationale, has backfired politically.
Covid-19 has propelled India on a mission of Atmanirbhar Bharat, or self-reliance. Besides re-energising the Modi government’s flagship “Make in India” initiative, this latest push for economic self-reliance has been accompanied by nationalist calls urging Indians to go “vocal for local”.
This urge is driven by a desire to reduce economic dependency on imports, specifically those from China, with whom relations are at a historical low, following violent border clashes in the high Himalayas in June 2020.
The push for going local is inconsistent with an outward-oriented trade policy accommodating liberal market access for imports. Fears of being swamped by imports from China and Southeast Asia led India to pull out of the Regional Comprehensive Economic Partnership. The emphasis on self-reliance and enhancing domestic competitiveness has led to a policy mindset that is sceptical of free trade agreements.
India’s scaling up of tariffs over the past few years to bolster “Make in India” has given an import-substitution sheen to India’s trade engagement. At the same time, India is encouraging foreign investment in various sectors of the economy. These contradictory strands have cultivated an unusual external economic engagement narrative that encourages foreign capital while discouraging imports.
Export-oriented foreign investment usually prefers locations with low tariffs that enable easy sourcing of imports for producing exports. Therefore, these investments are unlikely to rush to India.
The recent rush of large investments in India (such as from Facebook and Amazon) focus on acquiring local business assets for deeper footholds in the large domestic market. These domestic-market-oriented investments are different from the export-oriented capital that has yet to flow quickly into India.
The self-reliance initiative will not attract foreign investment if it is viewed as a nationalist project to substitute imports. India must reach out to countries and regions with a genuine desire to engage on trade through structured rules-based agreements.
For high rates of GDP growth, India must seek greater engagement in global trade. Covid-19 might facilitate that, with India at the forefront of global vaccine production, poised to export to the rest of the world.
Notwithstanding this upside, the challenges for reviving the economy are daunting. The prospects would brighten if the Modi government could revitalise the investment climate by restoring the financial health of banks, adopting a more open trade policy and persisting with reform.
Amitendu Palit is senior research fellow and research lead (trade and economics) at the Institute of South Asian Studies in the National University of Singapore. The views are personal. This article is published in a content partnership with the Asia Society Policy Institute’s Covid New (Ab) Normal initiative.